The settlement between the Public Investment Corporation (PIC) and Ayo Technology Solutions, in which Ayo will buy back part of the 29% interest the PIC bought in 2017, will result in only a small loss for government employees and pensioners – for now.

Originally kept confidential, Ayo disclosed some of the terms of the secret settlement in a formal announcement on Monday, noting that some media outlets were already in possession of some of the facts.

Ayo said it made the disclosure in terms of the Listings Requirements of the JSE.

“The company agreed to repurchase 17 202 756 ordinary shares in issue from the GEPF [Government Employees Pension Fund] for a total repurchase consideration of R619 423 100,” according to the announcement.

“The company wishes to inform shareholders that the agreement was entered into between the parties in good faith and in the best interest of the company and for the benefit of all shareholders. Going forward, the company, the PIC and the GEPF look forward to their joint endeavours in creating growth and value in the business of Ayo.”

Small loss

One needs to put the settlement – R620 million to repurchase the 5% interest, and effectively offering the PIC a put option at R20 per share over another 5% – into perspective.

Firstly, the PIC had some success in its efforts to recoup some of the tainted investment.

Read: PIC tackles Ayo in court

It brought the court action to reverse its investment in Ayo after a public outcry over:

• Allegations that the original investment in 2017 did not follow proper procedure at the PIC; and
• The fact that it put up more than 90% of the money and got less than a 30% stake in what was little more than a cash shell company at the time, and promises of huge acquisitions.

Ayo is paying R36 per share to buy back the first tranche of shares, compared to the original purchase price of R43 per share. The PIC received dividends: R3.36 per share since 2018.

Thus, the PIC needs to book only a small loss on this 5%, being the difference between R43 and R39.36.

Sceptics and government employees looking towards retirement might argue that the loss is unacceptable compared to the returns they would have received if the PIC had invested in something else, like a risk-free government bond.

In terms of the settlement, the PIC also has the option to sell a further 5% of the shares back to Ayo at R20 per share, maybe higher if the share price increases over the next three years.

“The GEPF also has the option, after a period of three years from the date of the initial repurchase, to sell up to a further 5% of the Ayo shares that it holds at the higher of R20 per Ayo share and the prevailing 90-day volume weighted average price of Ayo shares traded on the JSE,” according to the announcement.

A put option at R20 over some 17 million shares that trade at R4.65 per share would normally be worth millions – if not for counter-party risk.

The Ayo announcement says the future repurchase is subject to JSE regulatory approvals and the “solvency and liquidity” of the company at the time.

Gamble

Ayo’s solvency and liquidity look dire at present. It had only R1.1 billion in cash at the end of its last financial year (to the end of August 2022). The R620 million settlement will swallow more than half of that, while the group has been burning through cash at a rate of up to R1 billion a year.

It has suffered losses every year since 2018 – and the PIC’s R4.3 billion investment earmarked to grow the group? It has been used to enrich shareholders with unaffordable dividends and prop up underlying operating companies.

In this case, counter-party risk when offering an unhappy investor a put option means there is a distinct possibility that Ayo will not be in a position to honour its side of the transaction three years from now.

Meanwhile, the GEPF has to absorb a huge loss on its remaining 25% interest in Ayo – even when putting a value of R20 per share on the 5% covered by the put option.

When the PIC took up the shares on behalf of the GEPF in 2017, the 5% was worth nearly R740 million. At R20 each it is now worth R344 million.

The remaining 20% was worth R2.76 billion when issued to GEPF, but would fetch only R320 million if a buyer could be found at the ruling price of R4.65.

At the moment, and assuming the PIC would be able to sell that 5% at R20, the total loss of value amounts to R3.1 billion

The PIC essentially took a gamble on Ayo in 2017 when it originally put up R4.3 billion, and is still gambling that something good will come of this in the next few years – so much so that the settlement announcement notes that agreement was reached that the GEPF will not “unreasonably withhold approval” for a resolution by Ayo that would authorise it to render financial assistance to its subsidiaries.

Ayo had not responded to questions from Moneyweb at the time of publication. Any response will be added when received.